Secondary Station 3 [Diaphragm and Nose Cone]

In England and Wales, the supervision and authorisation (regulation) of insolvency practitioners (trustees and liquidators) is undertaken by a government agency, the Insolvency Service acting on behalf of the Secretary of State for Business Innovation and Skills (BIS), under statutory powers granted by the Insolvency Act 1986, or by one of seven recognised professional accountancy, legal or insolvency practitioners’ bodies under delegated functions

271_Ibid.

272_ibid

273_{See Browns & Symes 2013 (n 257) 13 -15 for reference to key decisions of Australian courts that have} considered the IPA code.

274_{Browns & Symes 2010 (n 250).} 275_Ibid.

276_{Browns & Symes 2010 (n 250).} 277_Ibid.

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within the framework of the legislation and memoranda of understanding.279 Thus, inEngland and Wales, there is a state body and a non-state body regulating the profession.

These seven professional bodies are responsible for regulation of insolvency practitioners based on terms agreed upon in memoranda of understanding between them and the Secretary of State.280 The powers conferred on the professional bodies cover: setting comparable standards between the bodies for education and experience; monitoring; investigating complaints; and discipline. The bodies report to the Insolvency Service on the proper discharge of their delegated functions and they are subject to monitoring by it.281 _Calitz appropriately identifies this regulatory scheme as being one of ‘government-monitored self- regulation’.282 _{It is submitted that it would also be appropriate to regard it, in essence, as a co-} regulatory system.283

In terms of the Insolvency Act 1986, it is a criminal offence (punishable by imprisonment or a fine) for an individual or company to act as an insolvency practitioner if they are not qualified to do so.284 If a person wants to act as an insolvency practitioner, they must acquire a license authorising them to act as an insolvency practitioner either by being a member of one of the recognised professional bodies or by making an application to the Secretary of State.285 The Secretary of State will grant a licence to the applicant once the similar eligibility criteria, by the recognised professional bodies, are met.286 These criteria relate to fitness and propriety as well as education and training.287

The English system, as it stands, is not a traditional co-regulatory system because the state is not involved only in the oversight of the regulation by the professional bodies. The Secretary of State is responsible for supervising the regulation by professional bodies and also regulates insolvency practitioners. The position, therefore, is that, under the existing regulations, some

279 _{In terms of ss 391 and 393 of the Insolvency Act of 1986 (hereafter referred to as Insolvency Act 1986).} 280_{Calitz 2008(n 148) 365.}

281_Ibid.

282_{Calitz 2008 (n 148) 363.} 283_{See 2.4, above.}

284_{In terms of s 389 (1) of the Insolvency Act 1986.} 285_{In terms of s 388 of the Insolvency Act 1986.} 286_{In terms of s 396-398 of the Insolvency Act 1986.} 287 _Ibid.

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insolvency practitioners are directly regulated by the Secretary of State for Business Innovation and Skills (BIS) and others are regulated by the listed professional associations.288

This has been criticised for creating a conflict of interest because the government is also the oversight regulator. Another problem is that the Secretary of State cannot impose fines or sanctions against insolvency practitioners for non-compliance but may only remove the practitioner’s licence. On the other hand, the professional associations can impose sanctions, including monetary fines, as well as restrictions on the type of work that the insolvency practitioner can continue to carry out. This led the government to include authorisation of insolvency practitioners in clause 9 of the draft Deregulation Bill, published by parliament in July 2013.289

In terms of the Draft Deregulation Bill, the Secretary of State will no longer be involved in the licensing and regulation of insolvency practitioners. Insolvency practitioners, who are currently regulated by the Secretary of State, will be regulated by one of the seven professional bodies that are involved in the regulation of insolvency practitioners. It has been noted that transferring regulatory powers from the state to the professional bodies would simplify the current regulatory framework and remove the conflict of interest mentioned above. It will also ensure that equal sanctions are imposed on all insolvency practitioners who have failed to comply with the standards required. The Minister of Business, Innovation and Skills, Jo Swinson, has stated that transferring the state’s power to regulate insolvency practitioners to professional associations will provide ‘greater clarity and consistency to the regulatory regime’. She also noted that the result of this would be that the state could now focus on its role of overseeing the regulation of the insolvency profession.290

The process is ongoing, however, as, in its latest report, issued on 19 December 2013, the parliamentary Joint Committee on the Draft Deregulation Bill recommended that clause 9 should be the subject of further consultation with all relevant stakeholders.291

288_{‘New measures to streamline insolvency regulation announced’ 01 July 2013 available at}

http://insolvency.presscentre.com/Press-Releases.New-measures-to-streamline-insolvency-regulation- announced-68efa.aspx accessed on 01 November 2013.

289_{Draft Deregulation Bill July 2013 at 3 available on www.parliament,uk.business/committees/committees-a-}

z/joint-selection/draft. The intention behind this Bill is mainly to save costs by reducing unnecessary state regulation in a number of government related spheres of activity.

290_Ibid.

291_{See the report of the Joint Committee on the Draft Deregulation Bill at}

http://www.publications.parliament.uk/pa/jt201314/jtselect/jtdraftdereg/101/101.pdf; accessed 22 January 2014. The main reason for this was the provision, in the draft Bill, for insolvency practitioners to be able to

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4.5Comments

Like South Africa, New Zealand has a state regulated system. As noted, there is no legislation in South Africa that regulates insolvency practitioners. Academics have emphasised the need for such legislation. However, in South Africa, the Insolvency Practitioners Bill has been postponed pending the finalisation of the insolvency practitioners’ policy. New Zealand, on the other hand, has made attempts to initiate legislation (in the form of the Insolvency Practitioners Bill) to regulate the insolvency profession.

As in South Africa, New Zealand does notspecify qualifications that a person must have to be an insolvency practitioner. The New Zealand Insolvency Practitioners has been criticised for its failure to provide adequate regulation, the result of this is that attempts have been made to improve the Bill to strengthen the regulation of the profession. Suggestions and proposals have also been made by professional bodies (NZICA and INSOLNZ) for a self-regulatory system. As mentioned earlier, these proposals have been supported thus indicating that New Zealand would adopt a self-regulatory system. However, INSOLNZ and NZICA should reconsider their proposal suggesting that New Zealand adopt a licensing system, taking into account the recent developments made in the UK where licensing as a requirement to practice as an insolvency practitioner has been removed.

It is submitted that South Africa should take into account the lessons learnt and the developments made in New Zealand. It is imperative that the South African government firstly initiate legislation to regulate insolvency practitioners and secondly encourage industry bodies to self-regulate the insolvency profession. The Australian state body ASIC has adopted this mechanism of encouraging and supporting insolvency bodies to regulate the profession.

As mentioned above the chairman of ASIC has warned of the possibility of the state over- regulating the profession if insolvency bodies do not self-regulate the profession themselves.292 It is submitted that this warning should also apply to South Africa and New Zealand. Consideration of this warning leads to the conclusion that state regulation of insolvency practitioners would be insufficient and there is a need for the industry to supplement state regulation of the profession in order to achieve and enhanced regulatory

register as a corporate insolvency practitioner only, or a personal insolvency practitioner only; see paras 210-4 of the report.

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system. After considering the main disadvantage of state regulation (i.e. that it is less flexible and responsive to change), it is submitted that there is a need for a self-regulatory or co- regulatory system to complement state regulation of the insolvency profession.

It is submitted that the combination of state regulation and the regulation provided by the Australian insolvency bodies provides satisfactory regulation of the insolvency profession. However, as mentioned earlier there have been some set-backs in the Australian self- regulatory system. The main disadvantage being that the codes are not binding on persons who are not members of the insolvency body. The result of this led to suggestions that Australia adopt a co-regulatory system, which would ensure that the codes are binding on every insolvency practitioner. England and Wales has a co-regulatory system in place that requires that every insolvency practitioner be a member of one of the professional associations and thus be bound by a code of conduct.

It is apparent from the illustration of the regulatory system in England and Wales (after its most recent developments) that co-regulation satisfies the criteria as regards what is expected of a regulatory system. It is submitted that Australia should adopt a co-regulatory system to ensure formal recognition of the regulation of the professional bodies. However, the Australian licensing system would also have to be reconsidered and removed, lest a conflict of interest similar to the system in England and Wales should arise. It is submitted that the system in England and Wales, once the Draft Deregulation Bill is enacted, would be the most suitable co-regulatory model to follow.

It is submitted that if, in the near future,South Africa or New Zealand were to adopt a self- regulatory system, which, it is submitted,would be a step in the right direction, it is most likely that after some time they too would feel the need to shift to a co-regulatory system.

4.6 Conclusion

The lack of regulation of insolvency practitioners has been a problem in many foreign jurisdictions. In the jurisdictions considered above, there is an apparent tendency to adopt, or to move towards adopting, systems of self-regulation or co-regulation of insolvency practitioners. Adopting these alternate forms of regulation has been perceived as improving the overall regulation of insolvency practitioners in these jurisdictions.

New Zealand’s state regulatory system has been criticised even after the recent introduction of the 2013 Insolvency Law Reform Bill. It has been noted that the regulation of insolvency

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practitioners is insufficient and that there are many gaps which the legislation leaves unfilled. It has been suggested that a self-regulating professional body would be most suitable to fill in the gaps and complement the legislation.

The Australian insolvency profession is regulated by the state and professional associations (such as the IPA) have initiated codes of conduct further regulating the profession. Only members of the association are bound by the codes, thereby illustrating the disadvantage of the codes being unenforceable against all insolvency practitioners because they are applicable only to members. One of the two Australian regulating state bodies, ASIC, has welcomed the code that has been initiated by the IPA and expresses its support of IPA’s attempts to assist in the regulation of insolvency practitioners. The aim of the IPA code is to fill the gaps that the legislation regulating the profession has left out, mainly focusing on providing standards of conduct for insolvency professionals.

One of the main criticisms of this system that have been noted by academics is that the codes initiated by the voluntary associations are not formally recognised. Although the IPA code has been approved by ASIC it is not formally recognised, which denotes that practitioners who do not wish to be bound by the code can terminate their membership with the association (if they are a current member) or refrain from being a member of the association. They will still be able to obtain or maintain a licence from ASIC allowing them to practice as a practitioner. The result of the lack of formal recognition of the code is also that the IPA and other voluntary associations are not accountable to anyone but their members, and such accountability is not necessarily through democratic channels. This has led academics to the suggestion that Australia should adopt a co-regulatory model to ensure formal recognition of the regulation of the professional bodies.

The Insolvency Act 1986, in conjunction with memoranda of understanding, as will the draft Deregulation Bill, once it is enacted, requires all insolvency practitioners to be a member of one of the seven listed professional associations. The state may also lay down what is expected of the professional association in terms of regulation of insolvency practitioners and lay down criteria of who should be eligible to practice as an insolvency practitioner. It also sets out requirements that the professional body must comply with in order to be able to regulate the profession.

South Africa and New Zealand have in place a state regulatory system that regulates insolvency practitioners. There is a need for an improved regulatory system in both

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jurisdictions. However New Zealand in comparison to South Africa has made attempts to improve its regulatory system by initiating legislation to regulate the profession and considering self-regulation of the profession.

It is submitted that regardless of the noted disadvantages of a self-regulatory system, New Zealand and South Africa should in fact adopt this form of regulation as suggested and perhaps, at a later stage, shift to a co-regulatory system. The purpose of this is to ensure that the relevant professional associations initiates a code, enforcement mechanism and monitoring system that is worthy of being formally recognised by the state. This is to ensure that the professional association implements a proper regulatory system and is capable of assisting in the regulation of the profession.

It is submitted that the co-regulatory system ‘ticks all the boxes’ in terms of what is expected of a regulatory system. If Australia, in the near future, intends to adopt a co-regulatory system, the Australian licensing system would also have to be reconsidered and removed lest a conflict of interest similar to that in England and Wales should arise. It is submitted that the system in England and Wales, once the Bill is enacted, would be the most suitable co- regulatory model to follow.

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CHAPTER 5 CONCLUSION